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Australia – Developing Resources Projects As The World Watches – International Scrutiny Of Social And Environmental Impacts.

10 November, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Energy & Project Finance

 

In brief
 
  • Social and environmental impacts of Australian resource projects are increasingly the subject of international scrutiny. 
  • This scrutiny is being driven by the expanding role of project finance and the changing international investment standards Export Credit Agencies (“ECAs”) and other financial institutions apply.
  • Project proponents need to be aware that the way they comply with domestic project approvals – from environmental regulation to native title – will be relevant to how investors assess a proponent’s compliance with international social and environmental standards.
  • The challenge and opportunity for Australian resources project proponents is to keep pace with the changes in this increasingly regulated space and minimise the reputational and financial risks posed.
 
Changes to international investment standards means that the management of social and environmental impacts of resource projects have never been more important. The “usual” front end approval requirements for Australian resources project (environmental, land access, native title and cultural heritage) are no longer simply “local law” issues. Greater international scrutiny of the social and environmental impacts of Australian resources projects has been driven by the dramatic increase of project financing for these projects, particularly by ECAs.
 
This article provides a brief explanation about:
 
  • the rise of project finance and ECA involvement in Australian resource projects;
  • how this has driven greater international scrutiny of a project’s social and environmental impact;
  • the changing international standards project proponents must grapple with to address this scrutiny; and
  • the risks and opportunities that these changes present. 
 
The rise of project finance
 
Project financing volumes in Australia over the past decade have averaged between US$15 to US$20 billion dollars. The mining and LNG boom over the past two years has meant that project financing in Australia is set to double this and rise to over US$40 billion this year (Project Finance International Magazine, 2012; NAB Corporate Finance Insights, September 2012). ECAs have played a significant role in this increase and are becoming integral in providing the finance demanded by the burgeoning energy and resources industries in Australia.
 
Project finance and the regulation of projects’ social and environmental impacts
 
The role of project financing and ECAs in financing projects particularly in the world’s extractive industries has not escaped significant international attention. This attention has been firmly focused on the social and environmental impacts of projects. This has led to the development and reform of the international standards governing how social and environmental impacts of energy and resource projects can be assessed, measured and mitigated. A prominent example of the impact of this attention and regulation on Australian energy and resources proponents is the Ex-Im’s, the US Government’s ECA, funding of the Australia Pacific LNG Project. Fuelled by Ex-Im’s stringent social and environmental requirements, which are based on international standards, Ex-Im faced legal action from Non-Government Organisations due to the anticipated environmental impacts of the APLNG Project. Instances such as this highlight the financial, reputational and operational risks project proponents can face if they do not have a 
strategy to identify and address the international investor standards now being applied to Australian projects by financial institutions and ECAs.
 
Changing international standards
 
This year has witnessed key changes in the international standards which govern how social and environmental impacts of energy and resource projects can be assessed, measured and mitigated. These international standards, increasingly being adopted by ECAs and other providers of project finance, are the International Finance Corporation (“IFC”) Performance Standards and the Equator Principles:
 
  • IFC Performance Standards: these standards provide financial institutions with a guide to managing the impact of projects on social and environmental factors from pollution prevention to indigenous peoples and cultural heritage. On 1 January 2012, the IFC Performance Standards were amended to strengthen commitments to climate change, business and human rights and corporate governance principles. Significantly for energy and resources companies, these amendments included the introduction of land acquisition due diligence, “free prior and informed consent” for lands subject to traditional ownership and specific requirements for biodiversity offsets and carbon emissions.
  • Equator Principles: the Equator Principles are a voluntary industry-developed social and environmental risk management framework adopted by over 70 financial institutions and ECAs worldwide, including NAB, ANZ and Westpac in Australia. In August this year, proposed changes to the Equator Principles were released. The proposed changes, if accepted by the member financial institutions, will extend the scope of the Equator Principles. The changes will also place more onerous assessment, implementation and reporting requirements on both financiers and energy and resource companies and incorporate new human rights and climate impact standards into financial conditions and loan instruments (see our publication Equator Principles III – New standards for project financing at www.ashurst.com/page.aspx?id_Content=8134 for a more detailed summary).
 
Implications for project proponents and their advisors
 
For project proponents, this attention and changing international standards means increasingly stringent loan requirements, higher standards to obtain a “social licence to operate” and a need for real and transparent mechanisms to assess and mitigate social and environmental impacts.
 
International standards, and the demand for socially and environmentally responsible investment, will be brought to bear upon Australian energy and resource project proponents through several influences:
 
  • specific loan requirements of financial institutions;
  • reputational pressure from international organisations and members of the public; and
  • possibly for the future, the incorporation of these standards into State project approval requirements.
 
The collision of these influences has been made apparent in the recent two United Nations visits to Australia on environmental and indigenous issues and the clash of federal and state government environmental assessments.
 
The first United Nations visit to Australia in 2012 resulted in a report by UNESCO that port development near the Great Barrier Reef was threatening the reef’s World  Heritage Status. UNESCO requested a halt to developments impacting the reef whilst a thorough assessment was conducted. This led to a significant clash between federal and state government environmental assessments, resolved by a plan to conduct a joint Strategic Assessment of legal and policy regulations of the Great Barrier Reef. The second visit was by the United Nations Special Rapporteur on the Rights of Indigenous Peoples. This visit reviewed the impact of extractive industries on indigenous people, including a visit to the Pilbara region and examination of Australian benefit sharing models and agreements.
 
This United Nations scrutiny reinforces the way in which project proponents comply with social and environmental regulation in Australia – from native title to environmental approvals – has moved beyond local law and now extends to the management of reputational and financial risk.
 
Project proponents will increasingly have to demonstrate that the way in which they comply with domestic approval laws meet the social and environmental international standards set by investors. Project proponents and their advisors will need to:
 
  • keep pace with changing international standards;
  • be aware of the financial risks of not doing so; and importantly
  • ensure they are aware of the secondary level of obligations, beyond those under Australian law, required under the international standards applied by ECAs and other financial institutions.
 
Importantly, the changing regulatory landscape also presents an opportunity. Project proponents who begin aligning their engagement and environmental strategies with international best practice – in anticipation of future involvement of project finance and ECAs – will minimise their future reputational and financial risk.
 

 

For further information, please contact:

 

Gavin Scott, Partner, Ashurst

gavin.scott@ashurst.com

 

Katie Allan, Ashurst

katie.allan@ashurst.com

 

Ashurst Energy & Project Finance Practice Profile in Australia

 

Homegrown Energy & Project Finance Law Firms in Australia

 

 

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